Connetics gains 46% on merger; Replidyne falls 45%, Forest down 6%; Adeza loses 16%; Amgen off

By Ronda Fears

Memphis, Oct. 23 - Amgen, Inc. was weaker Monday ahead of earnings but recovered in after-hours trade when the biotech giant reported pleasing third-quarter numbers and upped its 2006 outlook. Still, sources said the damage was already done for Monday but the negative tone reverberating through the rest of the biotech sector might reverse course Tuesday.

Thousand Oaks, Calif.-based Amgen posted reported third-quarter net income of $1.1 billion, or 94 cents a share, up from $967 million, or 77 cents a share, a year earlier, as revenues grew to $3.61 billion from $3.15 billion. Also, Amgen raised its 2006 EPS forecast to $3.85 to $3.95 from a previous estimate of $3.75 to $3.85, and adjusted its revenue outlook to $14.1 billion to $14.3 billion from $14 billion to $14.3 billion.

Amgen shares (Nasdaq: AMGN) declined in trade Monday by 58 cents, or 0.78%, to $73.37 but after the close bounced back from there and then some. At 5:07 p.m. ET, the stock was seen up $1.23, or 1.68%, at $74.60.

Ahead of the figures, the stock steered the biotech sector lower even as the Dow Jones Industrial Average continued to wow the markets, hitting repeated intraday highs, and the likes of Google, Inc. drove the Nasdaq upward. Meanwhile, the Nasdaq Biotechnology Index slumped 0.12% for the day.

"There were big drops across the board on my portfolio. Lots of fiscal information this week, both Fed-wise and earnings reports," said a biotech fund manager in Florida, blaming a conservative tact at the Food and Drug Administration on the weakness in biotechs.

"The sector sucks. The FDA is killing it."

Indeed, there were big drops for Replidyne, Inc. and Forest Laboratories, Inc. over an FDA rejection for their antibiotic Orapem, and Adeza Biomedical Corp. fell after the FDA required more tests for Gestiva, its drug to prevent preterm births.

Connetics climbs on buyout

While the biotech sector suffered Monday, Connetics Corp. was a stand-out gainer on its $640 million merger with closely held Stiefel Laboratories, Inc., which will take Connetics private.

Stiefel, which bills itself as the world's largest independent pharmaceutical company specializing in dermatology products, is buying Connetics for $17.50 per share, or roughly $640 million.

Connetics shares (Nasdaq: CNCT) shot up $5.36 on the day, or 45.77%, to $17.07 but was not expected to zoom past the merger price. The news was on the tape way before the markets opened, and the stock traded in a narrow band of $17 to $17.09 although volume was a heavy 9.2 million shares compared with the norm of 557,385 shares.

"It's pretty amazing," commented a sellside trader. But, like some analysts, he did not think a bidding war for Connetics would ensue as was seen over the past couple of months with AnorMED, Inc., which saw a bid from Genzyme, Inc. balloon to $13.50 per share from $8.55 per share after Millennium Pharmaceuticals, Inc. put a $12 per share bid in.

"This was way out of the ordinary if you ask me. Everyone is happy and happy enough to leave it at that."

Connetics announced that it will be acquired by privately held Stiefel Laboratories for $17.50 per share - a 49.4% premium from Friday's close and a 62% premium over the stock's 30-day average.

Over the summer, Connetics stock suffered as the result of restatement of financials back to 2001 that resulted in a writedown of revenues and earnings, and jeopardized the acceleration of its 2.25% and 2% convertible notes. But the company swung to a profit in first-quarter 2006.

Coral Gables, Fla.-based Stiefel Labs, founded in 1847, bills itself as the world's largest independent pharmaceutical company specializing in dermatology. Palo Alto, Calif.-based Connetics also specializes in dermatology products.

Connetics bidding war not seen

Merrill Lynch & Co. analyst David Munno also said in a report Monday that he does not expect a bidding war for Connetics, due to the premium price tag as well as the price putting Connetics' value in line with its peer "despite significant overhangs to the stock (shareholder litigation, generic risk, SEC investigation)."

Other drawbacks, Munno said, are the threat of a generic filing for Connetics' lead product Olux, for psoriasis, and the lack of patent protection for Soriatane for severe psoriasis, its second best selling product, which together account for about 55% of estimated 2007 sales.

Furthermore, Munno said the potential Connetics suitors - Sciele Pharma Inc., Mentor Corp., Medicis Pharmaceutical Corp. and Warner Chilcott Ltd. - would not likely pay a premium to Stiefel's offer.

"Sciele probably couldn't, Medicis and Warner Chilcott probably wouldn't," Munno said in the report, "and we don't think Mentor's opportunity in dermatology is near-term enough to justify a bidding war."

Thus, onlookers expect Connetics stock will trade flat around the acquisition price until the deal is completed.

As it stands, the Stiefel buyout is expected to be completed later this year or early next year.

Replidyne routed by rejection

Heading the parade southerly, Replidyne, Inc. shares were bludgeoned Monday, and partner Forest Laboratories, Inc. fell hard, after they reported that the FDA had issued a non-approvable letter for their oral antibiotic Orapem without further trials, which the companies estimate will take at least two years to complete.

"This is not your typical oversell situation after a small quarterly miss," remarked a buyside market source in Boston. "This FDA decision could literally kill this corporation [Replidyne]."

On Monday, Replidyne shares (Nasdaq: RDYN) fell $4.65, or 45.41%, to close at $5.59, but that was up sharply from the intraday low of $4.80.

Forest Labs shares (NYSE: FRX) dropped $2.93, or 5.69%, to settle at $48.54.

Replidyne submitted its drug application in 2005 for Orapem, or faropenem medoxomil, for four indications - acute bacterial sinusitis, community-acquired pneumonia, acute exacerbation of chronic bronchitis and uncomplicated skin and skin structure infection, based on the results of 11 phase 3 clinical trials and safety data of more than 5,000 patients.

Forest and Replidyne inked a commercialization pact in February 2006. Forest chief executive Howard Solomon said it is committed to working with Replidyne on the project for at least two respiratory indications.

"This is dead money for at least two years and very high risk," the buysider continued, adding that the situation exasperates frustration with the marketing effort from the company during its IPO roadshow over the summer.

"With no income and a large cash burn, they may not have enough cash to make it happen and there's no guarantee it ever will. 'Not approvable' is typically a death knell for any product that needs FDA's blessing to go to market. There are no shortcuts and no guarantees. It could still be 'not approvable' two years from now. Why buy this stock? The only thing at the end of this rainbow is more rain."

Replidyne chief executive Kenneth Collins, however, said the company, which went public in late June, is in a strong financial position to continue the development of faropenem with Forest and to advance its pipeline. Louisville, Colo.-based Replidyne raised $45 million in gross proceeds from its downsized initial public offering of 4.5 million shares - cut from 5 million - at $10 each, discounted from price talk $14 to $16.

Adeza off 16% on more studies

In another FDA downer, Adeza Biomedical Corp. fell after announcing it had received an FDA approvable letter for Gestiva, its synthetic progestogen to prevent preterm birth, subject to the completion of an additional animal study and other conditions.

"Seems the FDA has significant concerns and requires more tests and data before ever granting approval for Gestiva," said a sellside trader.

"Adeza is attempting to slant bad news in a positive light in their press release but this is not good news. This is certainly not what The Street expected to hear from the FDA. The additional clinical trial may take a couple of years and the results may not support drug approval. It is pretty risky."

Adeza shares (Nasdaq: ADZA) lost $2.94 on the day, or 16.4%, to end at $14.99.

Sunnyvale, Calif.-based Adeza also said Monday that preliminary third-quarter product sales are up 17% to around $13.5 million from $11.5 million a year earlier and up 4% sequentially from $13 million in second quarter.

Columbia gains on Adeza news

Columbia Laboratories, Inc., however, gained at Adeza's expense, taking the opportunity to point out benefits of its competing natural progesterone Prochieve in comparison with Gestiva to prevent preterm births.

Columbia Labs shares (Nasdaq: CBRX) gained 41 cents on the day, or 12.58%, to $3.67.

Prochieve has been on the market for nine years and is approved for progesterone supplementation or replacement for infertile women and for the treatment of secondary amenorrhea. Columbia Labs is conducting studies of Prochieve for preterm births with results anticipated in early 2007 and, if positive, plans to apply for the label expansion in mid-2007, and to provide a recognized, safe, natural progesterone that is easily self-administered by mothers who are at risk for preterm birth, concluded Mills.

"From the news today, it looks like Adeza was attempting to obtain FDA approval prematurely," said a sellside trader.

"Everything eventually bears out."

Livingston, N.J.-based Columbia Labs noted in a press release that the FDA stance on Gestiva was favorable for Columbia.

"As they get closer to trial data being completed, it is getting time for the company to start beating the drums about Prochieve so that the ob-gyn market knows it's coming soon," the trader continued. "It should be an interesting 90 days. Everyone will be looking forward to the conference call, which may actually have some news this time."

Lexicon to bag $40 million

Lexicon Genetics Inc. was off in trade Monday on news it will settle a $40 million direct placement later this week.

A group of institutional investors has agreed to buy 10.6 million shares at $3.78 each - a 6.9% discount to the company's $4.06 closing stock price on Friday.

On Monday, Lexicon shares (Nasdaq: LEXG) dropped 21 cents, or 5.17%, to settle at $3.85.

"The saying goes: It takes money to make money. For some of us that have been here a little while, this isn't a big deal, and a milestone of a sort. This could move some drug candidates into trials, the building upon all the work that's come before that makes Lexicon's potential unique. We knew the shelf was there and likely to be tapped," said a market source.

"We do lose a portion to dilution, but get the dough along with the knowledge that there are new investors buying in and as Lexicon's targets and compounds undergo their most important tests."

Proceeds will be used for research and development, including preclinical and clinical development of the company's lead programs, as well as for acquisitions, business investments and working capital.

Based in The Woodlands, Texas, Lexicon Genetics develops treatments for diseases like diabetes, obesity, cardiovascular disease, psychiatric and neurological disorders, cancer, immune system disorders and ophthalmic disease.

Iomai to pocket $10 million

In another PIPEs transaction, Iomai Corp. said it plans to wrap a $10 million private placement with Essex Woodlands Health Ventures and New Enterprise Associates, although full terms of the deal could not be determined by press time Monday.

Iomai shares (Nasdaq: IOMI) took a dip Monday, losing 27 cents on the day, or 4.95%, to close at $5.18.

"Someone is buying on the weakness. This is a very good sign," said a sellside trader.

"This will give some breathing room regarding the cash burn rate. This funding significantly reduces the risk profile as it gives us another six months of room to wait for good news."

Proceeds from the offering will be used for the clinical development of the company's patch-based vaccines and immunostimulants.

Based in Gaithersburg, Md., Iomai develops vaccines and immune system stimulants delivered in needle-free forms.

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